Bancorp Inc (TBBK) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Bancorp, Inc. Earnings Conference Call. My name is Alexis, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS].

I have been requested by the Company to make the following statements. When used in this conference call, the words believe, anticipate, expect, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks, uncertainties, which could cause actual results to differ materially from those anticipated or suggested by the statements. For further discussion of these risks and uncertainties to Bancorp and Corporation filings with the SEC, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The Bancorp, Inc. undertakes no obligation to publicly release the results of any of the revisions to the forward-looking statements, which made be made to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated events.

I would now like to turn the presentation over to your host for today's call, Ms. Besty Cohen, CEO of the Bancorp Corporation. You may proceed, ma'am.

Thank you, and --. Thank you, Alexis, and welcome to everyone today. I have with me today Frank Mastrangelo, President, and Marty Egan, Chief Financial Officer of the Company. And we are delighted to be reporting to you today on what we consider to be a good quarter.

Net income from operations increased by 105%. Total assets, and that is year-over-year, first quarter-over-first quarter. Net interest margin increased to 4.65% for the three months ended March 31, 2006, from 4.44 for the similar period in 2005. And again, a year-to-year comparison, first quarter of '06, the efficiency ratio declined to 55.29% from [inaudible] in the prior year.

On a linked quarter basis, total assets grew by 12.5% to over $1 billion, and I think this is the first time we have reported a quarter where assets exceeded $1 billion, and it is something which gives the Company and everyone connected it with it, who contributed to this kind of growth, a feeling of great pride.

This is the first quarter in which we are including a non-interest expense. The FAS 123 R share-based payments expense, and as we put into the press release, that expense represented $92,000, which both is included in the base number, from which we derive the efficiency ratio, and also, obviously, as an earnings expense.

The diluted earnings per share were $0.20 a share, and I would compare that to really $0.09 a share on a pretty extraordinary expense basis in the first quarter of 2005. Loans grew by $80 million on a net basis and this quarter we funded those loans, primarily during the month of March. And we had paydowns in the loan portfolio primarily during the month of January.

And that combination, together with the traditional, for us at least, seasonal shift in deposit mix from the fourth quarter to the first quarter, resulted in a slight decrease in net interest margins, but still an increase over the same period last year.

The seasonality of the portfolio is also reflected in such lines of business as health savings accounts, which, as we shared with you, often get opened in the fourth quarter but not funded until the first quarter. Merchant processing, which, as a retail event, reaches its peak in the fourth quarter with some small spillover into January, but then declines precipitously for the second and third months of the first quarter.

Private client is not quite as seasonal a business and in the metrics that we are going to share with you, we think we have some excellent news about the total assets under management and, just to remind those who may have forgotten, we give you metrics each quarter. We try to make them the most meaningful metrics for you. One of those that we have come up with and reported consistently over the last year is assets under management for the project clients or asset management group, for which we provide private label banking products.

The reason that we do that is that there is tremendous disparity inside among clients and for us simply to report as we did initially the number of clients, that just didn't make any sense because our opportunity is really related to the asset center management. Frank will have some excellent news in that area for you in just a moment.

I think that we have approached the earnings level that was anticipated by our two analysts, in fact exceeded it, in one case, by a penny. I think the consensus is right. And on the other side, roughly $0.02. That gives us great comfort, the business model that we reproducted is not only effective as to balance sheet growth, but also as to profitability.

I am going to ask Frank to give you a little bit more color, as they say, on the metrics related to the private label banking product. Frank?

Thank you, Betsy. During the first quarter of 2006, [inaudible] deposits grew to be 36% of our total core deposits, which was a nice increase from Q4 2005, up from 33% there. The real drivers behind that growth really worked, as Betsy mentioned, a very strong quarter for the healthcare group, which almost doubled the total number of HSAs that we held at the end of the quarter in excess of 37,000 HSA accounts and almost $42 million in total deposits, which is almost a $25 million increase in deposits on those accounts during the first quarter.

As Betsy said, many accounts opened in the fourth quarter and early in the first quarter and funded in the first quarter, as employers began to fund those accounts. Our private client group deposits also grew substantially during the quarter, up almost $14 million, and we made new loan commitments in the private client group of almost $31 million, up 30% on quarter-to-quarter basis.

Assets under management that our private client group customers custody also grew substantially during the quarter through two new agreements with asset management firms. In the fourth quarter of 2005, those clients custodied $37.5 billion in total assets. We end Q1 2006 with clients that custody $85.4 billion in total assets. So, a substantial increase there in the scope and size of the market available to us to provide our services to in that line of business.

Lastly, the merchant group that Betsy mentioned - - on the card side there was slight drop-off in volume, which was expected, given the seasonal nature of that business. But our ACH business continues to increase, up 26.8% on a quarter-to-quarter basis and non-interest income increasing almost 20% on a quarter-to-quarter basis.

Thank you, Frank. I think we always have to say that, when we sign new accounts, it does take a quarter or two for them to find impact on our balance sheet and in our earnings, so we try to bring you the news as quickly as possible, but again, with the caution that it does take time for implementation.

I think that I would like to pause there and, Alexis, if you would ask if there are any questions, that would be helpful.

[OPERATOR INSTRUCTIONS].

Tom Doheny, Sandler O'Neill & Partners.

Good morning, guys. Just wanted to follow up on a few items. You mentioned the hit on FAS 123 R, I think, 92,000. Is that a pretty good run rate for what expense you are going to incur for the course of the year?

I would think that they would be slightly greater in the fourth quarter, but I think that for the first three quarters that that is probably not a bad run rate.

Okay. And can you venture a guess on how much that picks up in 4Q?

I really can't because it is really dependent in part on many of the people who came with us, came in the period, which was around September, so they get reviewed at that time. And it depends on their performance and everything else.

Okay. And on the margin, and I think I kind of missed some of this in your commentary, you indicated that some of the pressure on the margin was due to when the loan growth occurs in the quarter. Maybe you could take me through that again.

Of course. In January, we had, for us, some significant paydowns in the portfolio. So, we were running through January and February with a slightly lower portfolio than we had anticipated. That was overcome because we had a very good pipeline by new loans that we were originating. But those loans did not actually close until March.

And so, what you are seeing in the $80 million net increase is not $80 million in loans that were generated, but $80 million net of all of paydowns, so a significantly greater number than that, but those loans did not close until March. That is half of the story or it is probably more than half the story arithmetically.

The other side of it is that, traditionally, a commercial deposit started in the first quarter and escalate over the course of the year and take a slight retreat in the first quarter of the year. So, we had a bit of a spike and I think we reported to you that we closed the year a little bit higher than we anticipated at the end of 2005, and that the traditional setback was taken for the first quarter 2006. So, a little bit of deposit makes a little bit of loan timing funding made up that difference.

And then going back on the deposit side again, the fact that you had a strong HSA growth in the quarter, did that contribute, kind of replacing commercial deposits with some of the HSA deposits [inaudible]?

It did, but again, it is a matter of time. The commercial deposits generally run off in January and the funding for HSAs is a much more steady thing culminating in March. So, all of these vectors were present within the quarter.

Okay, great. That's helpful. And then on the C income side you mentioned [inaudible] a big increase with the income this quarter. By category, any specific driver? Was this service charges on deposit accounts or where was most of the strength this quarter?

Marty, do you want to help us there?

Sure. It was consistent across the board, Tom. [inaudible] income was strong. I think HPs were also up quarter-to-quarter. There weren't too many drivers.

I don't think - - it is just growth of the institution itself.

Great. I appreciate it. Thank you very much.

Brad Ness with Friedman, Billings and Ramsey.

Hello. How is everyone doing?

Everyone is fine. Thanks, Brad.

Good. I have several questions here. Just starting with [inaudible] another great quarter for you guys. What are your expectations going forward? Do you still think you can keep up this type of growth throughout the year?

We do not see anything changing in our business.

Okay. That is good. And it seems like the last couple of press releases and conference calls typically gave some type of [nim] guidance for the foreseeable quarter or quarters? Any - - ?

Well, I think I was always saying we can't keep this up again, and then we did. I think it is - - we think that we are running at a significant net interest margin that there can be weeks, on a quarter-to-quarter basis from the timing of funding, both on the deposits and the loan side, and so we wouldn't like to - - and we are not annular enough at this time to have those all smooth out. So, there is a little bit of lumpiness, and we just ask your indulgence on a little up and a little down.

So, it seems like, within your range of 10, 20 days to the point, you are looking for it to be rather steady.

Right. We do not see our net interest margin falling apart, if that is the question.

Okay. That is good. And any updated thoughts on maybe expense polls, whether measured by efficiency ratio or just non-interest expenses relative to the assets?

Well, if you take out the 123 R expenses, we continue to believe that, as we shared with you consistently, that we will continue to chip away at the efficiency ratio. It is our hope and, not predictions, but these thoughts about the direction of the efficiency ratio.

Of course, not including any 123 R numbers, but to go back to what we had been saying, I think we were talking about being roughly around 50% by the end of the year. That could be 49, it could be 51. But I think we are on track to continue to chip away at that efficiency ratio.

Okay. And did you say that 60% [inaudible] was excluding the 123 R or was that including?

Well, I think I was trying to relate to what we had said previously, and I think the 50% did not include the 123 R. Whether we can improve upon our performance in a sense and make that inclusive of 123 R number, we are working at it.

Okay. And I have some housecleaning issues too. I missed some of those numbers. With the private client group, I know you guys mentioned the increase in loans and deposits and I guess I was unclear if that was an increase relative to the first quarter of '05 or the fourth quarter of '05. So, could you guys just maybe mention the aggregate balance of both the loans and deposits on the private client side?

Sure. Frank, do you want to do that again?

Sure. Absolutely, Betsy. The total deposits generated by the private client group at Q1 2006, Brad, were $57 million and aggregate loan commitments made from the private client group, again Q1 2006, $131 million.

And there is a pipeline of almost $50 million on top of that. How does that compare, Frank, to Q4 2005?

Commitments are up 30%. Aggregate outstandings are up 25% and pipeline is about 10% larger than Q4 2005.

What did you say the balance was of the - - not the pipeline, not the commitments, but just the total loans on your books?

Sure. Frank, you have that? If not, I have it.

For private clients or total loans?

Yes.

For private clients - -

Private client was $48 million outstanding.

Okay.

You may remember that we discussed the fact that one of these commitments that are taken down are lines, and so it takes several quarters for the line to be drawn.

Okay. And one last thing here. Same kind of question on the merchant processing side. What did you say the total deposits were at the end of the quarter?

$90 million. Is that right?

That is correct.

$90 million, okay. Well, I have some more, but I will yield the floor to other people right now, but I may jump back in.

But you will be welcome back.

Thank you.

[OPERATOR INSTRUCTIONS].

[James Breckard], Stern AG.

Good morning. Nice quarter. Maybe I missed your comments. Did you say you had signed two new asset management agreements?

We did.

When were those actually signed?

One was signed, I think, the third week in March and I don't remember when the other one was signed. Frank?

The other one was signed very early in the quarter, maybe the beginning of February - - end of January, beginning of February.

We actually did see from that second group, not deposits yet, but loan requests.

And did I miss - - was there announcements on those?

No. Sometimes our clients are not either willing or initially in a position to help us - - let us announce the relationship.

I guess that is why they call it private label.

Yes, exactly, and we are very respectful of our clients.

Well, that seems like very big news. Fantastic.

I think it is big news, and we are very excited about it.

All right. Well, nice work. Thank you.

Tom Doheny, Sandler, O'Neill & Partners.

Hi guys. I just wanted to touch on a few others, I guess. First is on the loan portfolio mix. I guess if I look on a dollar basis, the largest driver of growth for loan portfolio year-over-year is probably the private construction portfolio. Just wondering where you are comfortable taking that portfolio as a percentage of loans and just how you are feeling with overall, the quality of that portfolio.

Well, the quality of that portfolio is reflected in the quality of two things. One, our portfolio is a whole where you may have noticed that we had no commercial loans cast there to date. Secondly, it is a portfolio of builders and other folks with whom we had dealt over a very, very long period of time and very consistently and very effectively. So, we feel very comfortable with that as an area of our expertise and with the client base that we have. Just not to say, Tom, that we don't add new clients, but we have the core of a growing, seasoned client relationship group.

So, we feel comfortable with its growth, relative to the portfolio and, again, would remind you that some of that has some seasonality in that it is generally - - there are construction lines. Often there are drills in those lines during this time of year and then some paybacks in the third quarter. So, there is some seasonality, and you will see that go up and down a bit.

Okay. Then in terms of the [inaudible] percentage of the loan portfolio, are there any guidelines there or anything you feel or don't feel comfortable with there?

No. I think that we try to take the credit and look at the diversity within the portfolio. Sometimes there is an opportunity, which, although it is the same lending category, provides actual diversity, just an opportunity which provides actual diversity because of geography or type or whatever have you. So, we are always looking and refining the mix within that portfolio.

And not looking at the - - not looking to cap anything just by actual categories.

No.

Okay. And then secondly, just wanted to touch on, I think the tax rate bumped up a little bit this quarter. I am wondering if that is a good run rate for going forward.

Marty?

Yes, that should be a good run rate going forward, Tom.

About 37, 37.5?

Yes.

All right. That's helpful. Thank you.

Brad Ness, Friedman, Billings and Ramsey.

Thank you. With you guys continuing to fire on all cylinders, what do you think obstacles are going forward? What are you guys concerned about [inaudible]?

Well, I think that I wouldn't put it on a level of micro-concern. We always are concerned about the economy. We are always concerned about, in a sense, since we do security space lending, the quality of the earnings of company to cross the board because, in fact, we are exposed to them through their shares of stock. So, we have a series of these kinds of macro-concerns.

On the business side, though, we think we have put in place, and continue to put in place, good personnel consistent of a management-intensive business that the risks that are attending to what we do are the risks of banking it large, whether that be in the loan area, in terms of delinquency, whether it is fraud, whether it is deposit risks, ATH risks. Whatever it happens to be, they are the traditional bank risks. We try to worry about them all the time.

We have a risk committee made up of senior management that meets very, very regularly and really thinks about not all the departments are represented and come together to think about how we can refine our processes to address either new or increasing or systemic risks that are just part of our business. And we reflect our business philosophy, which is that we cannot avoid the risk. We can only manage it. And we try to manage it in the best and most thoughtful way possible.

Okay. Thank you. And looking at 2006, besides all your other business levers, are there any new projects or new initiatives that you are going to focus on?

Well, we always have new projects and we think, although we misfired in the last quarter, in the sense that we thought we had approval for a new product, which turned out we had more regulatory work to do and turned it over to Frank, that we now have a [inaudible] for a product that Frank can describe here.

That's right. Thank you, Betsy. We have taken what we call just a bank interest-bearing demand account and registered it onto the DTC and NFCC platform, which is of significant interest to many of our private client customers. As Betsy mentioned, we thought we were through the process last quarter, but unfortunately it took about a quarter longer to work through a handful of remaining issues and approvals that were necessary for us to launch the product.

We now believe all of those approvals are in place and we will be launching that product in the next two to three weeks. And as I said, that is a deposit-gathering product that is of significant interest to many of our private client group customers.

Many of the private client groups manage also 401ks and IRAs and that kind of thing. And all of these approvals are necessary for the holding of those funds. And so, we think the barrier to entry here is the fact that it is layer upon layer upon layer of regulatory approval together with operation and technology barriers. And we have clients kind of teed up ready to go.

Right. As you mentioned, this is a product we have been working on launching for a little over a year now.

It sounds like a unique, interesting product. What would be the expectations as far as total deposits gathered under such a product, maybe in a year's time frame?

I don't know that we are ready to give you that number yet. But I guess we can say that we think we have $25 million lined up to go into it, but that is not the answer to your question, and I do not think we are there yet.

Okay. Last question and then my last housecleaning question. Do you have the ACH transaction volume and the merchant volume too per quarter?

Yes, I do. In Q1 we did 3.36 million transactions, compared to 2.65 million in the prior quarter, the ACH side. And in Q1, we had card volumes of $439 million. That is volume. As opposed to $452 million in Q4, which, as we told you, is our traditional high quarter.

Okay, great. Thanks again.

[OPERATOR INSTRUCTIONS].

At this time, there are no further question in queue.

Thank you, Alexis, and thank all of you for your good and thorough questions. And we look forward to talking with you at the end of Q2.

Ladies and gentlemen, I would like to thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect, and have a great day.